Lessons from Carillion: directors’ duties and practical tips


Author: Bree Taylor


With the Commons Select Committee inquiry into Carillion in full swing, the press reports feature sensational allegations levelled at the directors and former directors. The FCA is looking into the market announcements that were made pre-liquidation, one shareholder is calling for an investigation into management and the Chair of the Work and Pensions Committee has described a situation where investors were “fleeing for the hills”.

Regardless of whether these sorts of headlines ultimately lead to any action for unpaid creditors and workers (we all remember similar sensationalism in relation to the collapse of BHS), many company directors are wondering what they can be doing to avoid criticism in the event that the company ever enters an insolvency process. Here are a few pointers to make sure you are covered in the event that the worst happens:

  1. Get hold of the financials on a regular basis. If the management accounts are not easily accessible with key point summaries included, ask for changes to how information is presented and circulated. One of the most common criticisms of company directors in insolvencies is their failure to see a problem coming. When insolvency threatens, cash flow forecasts become key.
  2. Insist on regular meetings to review the situation. This is the second part of the point above. It is essential to be able to show you have sought out financial information to help you understand what is going on. But you also need to act on it. Many cases brought by liquidators against company directors involve allegations that directors’ took a “head in sand” approach over the period of time.
  3. Take advice. If things appear to be heading for the worst, get advice on the options available, usually from a reputable insolvency practitioner, the company accountants, or turnaround specialist. Engaging this sort of help does not mean you are headed for liquidation. The professional help is to tell you when you have reached the point when it is time to stop trading. Conversely, if you are advised you are not at this point, this could provide very valuable evidence in your favour if the company subsequently goes into liquidation.
  4. Entity by entity. Many UK companies operate as part of a group structure. The directors on the board of the “top co” might also be directors on the board of some or all of the subsidiaries. English company law and particularly insolvency law focuses on the individual entity, not the group. Many cases brought by liquidators against company directors are for breach of duty to an individual (insolvent) company where the director failed to consider the needs of that company, preferring to take a bigger picture or group view of matters. Always ask yourself: “Is this in the best interests of the company (not the group)?”
  5. Duties to creditors, not shareholders. As a director you owe your duties to the company. When the company is insolvent, you owe your duties to the creditors. If you are even remotely concerned that the company could be heading for insolvency, it will serve you well to be thinking about how to preserve value for the benefit of creditors and how to avoid worsening the overall position of creditors as a whole. This consideration will sometimes conflict with your natural allegiance to shareholders. Take extreme care over dividends and any transactions with shareholders. Take care also over communications with shareholders and the market.
  6. Consider contracts. If it appears that the company is heading for insolvency and particularly if creditors are threatening to or are actually taking action, consider the “events of default” provisions in key contracts with customers. These clauses can sometimes be triggered – setting off a chain reaction of events – even where the company has prospects of survival and a plan to avoid insolvency.

Lastly, D&O Cover

Being on the receiving end of a claim by a liquidator or shareholder (or the subject of an investigation by the FCA or the Insolvency Service) is costly, stressful and very distracting. Make sure your D&O Cover is suitable and sufficient to cover you, not only for any liability for the company’s debts but for legal defence costs. Make sure the premiums are paid, read the exclusions that apply (look out for insolvency exclusions) and ensure that you have a realistic limit of cover given the number of directors and the size of the business.

Bree Taylor, Partner, Fladgate LLP (btaylor@fladgate.com)

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